On December 19, 2016, International Monetary Fund Managing Director Christine Lagarde was convicted of criminal negligence for failing, as French finance minister, to appeal an adverse arbitration award against a French government-owned company.  This criminal conviction suggests increasing peril for arbitral tribunals and government officials involved in international arbitration.  It remains to be seen whether this conviction impacts future decisions of state respondents who might otherwise be inclined to settle, recognize, or agree to pay for future commercial or investor-state awards issued against them.

Ms. Lagarde’s conviction stems from her involvement in a decades-old case regarding controversial French businessman Bernard Tapie.  When Mr. Tapie was appointed as a French government minister in 1992, he was forced to divest his business interests, including his ownership of German apparel brand Adidas.  The deal was handled by a subsidiary of French state-owned bank Crédit Lyonnais, which sold Adidas to a group of investors that included another Crédit Lyonnais subsidiary.  A year later, Adidas was re-sold at a much higher price, leading Mr. Tapie to claim the bank had cheated him out of several hundred million euros in profit.  Years of litigation between Mr. Tapie and the bank ensued.

In 2007, the parties agreed to refer the dispute to binding arbitration.  Ms. Lagarde, then the country’s finance minister and overseer of Crédit Lyonnais, signed off on the referral.  In 2008, a three-member arbitral tribunal ruled in favor of Mr. Tapie, awarding him nearly €300 million.  The government, including Ms. Lagarde, chose not to pursue an appeal or annulment of the award in the French courts.  However, it eventually emerged that one of the arbitrators had extensive and undisclosed ties to Mr. Tapie and had colluded with him to influence the result of the arbitration in Mr. Tapie’s favor.  A challenge to the award was then launched, and in 2015, the Paris Court of Appeal overturned the award, ordering Mr. Tapie to repay the money he had collected from the Crédit Lyonnais subsidiary.  The French Court of Cassation upheld this decision in June 2016.

L’affaire Tapie” also led to a criminal investigation of Mr. Tapie’s lawyer, the corrupt arbitrator, and Ms. Lagarde.  Ms. Lagarde was accused of negligence in agreeing to remove the case from the French courts and sending it to arbitration, and also for failing to challenge the arbitrators’ decision, in the process disregarding advice from others in her ministry.  (It had also been alleged that French President Nicolas Sarkozy ordered the arbitration referral to reward Mr. Tapie for supporting his campaign, and that Mr. Tapie had a suspiciously cozy relationship with government officials, but Ms. Lagarde was not charged with corruption.)  The French court ultimately acquitted Ms. Lagarde on the first ground, but convicted her for her failure to challenge the award.  The court, however, ruled that Ms. Lagarde would not be subject to prison or a fine.  The case against the tainted arbitrator and lawyer remains pending.

The prosecution and conviction of Ms. Lagarde may seem surprising to U.S. observers.  In the United States, government officials are typically not subject to criminal prosecution for negligence in conducting official business.  France and many other countries do criminalize negligent conduct, which can lead to excessive caution and delay in official decision-making. Even so, the lead French prosecutor publicly stated that the case against Ms. Lagarde was “very weak,” and it is highly unusual for a senior government official to be prosecuted for choosing not to challenge an adverse arbitration award rendered against the state.

The Lagarde conviction is only the most recent cautionary flag this year for arbitrators and arbitration parties who may be held to heightened scrutiny for perceived criminal improprieties.  In October 2016, the United Arab Emirates revised its criminal code to provide for the prosecution and imprisonment of arbitrators who violate their “duty of fairness and impartiality.” Commentators have suggested that, in reaction, some arbitrators have begun to decline to sit on tribunals seated in the UAE, and parties have begun to question choosing UAE as a venue for their disputes.

Ms. Lagarde’s conviction might also undermine resolution of international arbitration involving sovereign governments, as it may put state actors in fear of legal jeopardy if they attempt to settle arbitration claims or fail to challenge unfavorable awards.  Even before this recent development, investor-state disputes and other large-scale international arbitrations have produced extensive post-arbitration enforcement litigation.  The length, cost and complexity of these proceedings create a high bar for investors seeking justice.  The ongoing Yukos saga is an obvious example, featuring highly contested enforcement actions in courts around the world.  Similarly, in cases before the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID), states routinely seek to annul awards issued in favor of investors.  If state officials might face prosecution for failing to challenge an unfavorable award, this phenomenon could be aggravated.  Indeed, even more than usual, state officials could very well feel compelled to seek every opportunity to frustrate enforcement of even meritorious claims.  Unfortunately, this instinct could play into the hands of critics of arbitration and investor-state arbitral mechanisms by undermining the speed, cost and finality of arbitration.

From a practical perspective, these developments reinforce the importance of selecting an arbitration-friendly forum as the situs of arbitration.  And in a dispute brought under an investment treaty, due consideration should be given to the state respondent’s track record of compliance with prior arbitration awards, as well as (perhaps) its tendency to hold officials accountable for decisions regarding arbitration.